I.B.M. to Buy Content Software Maker for $1.6 Billion

By STEVE LOHR

Published: August 11, 2006

CORRECTION APPENDED

I.B.M. announced yesterday that it planned to pay $1.6 billion for FileNet, a maker of software that helps companies manage documents and other digital information.

The planned purchase, analysts said, is a move by I.B.M. to strengthen its position in the fast-growing market for so-called content management software. The market is thriving as companies struggle to find timely and useful nuggets of intelligence in the mountains of information stored not only in structured corporate databases, but increasingly in reports, e-mail archives, Web pages, video clips and podcasts.

FileNet, based in Costa Mesa, Calif., competes with Documentum, which EMC acquired in 2003 for $1.7 billion. But I.B.M., according to analysts, is preparing for broader competition with its biggest software rivals, Microsoft and Oracle, which are also moving into the market for content management.

Jim Murphy, an analyst at ARM Research, a technology research and development group, said, ''I.B.M. cares mostly about Microsoft and Oracle because this technology is becoming increasingly important strategically and to their corporate customers.''

Oracle is moving into the content management business from its mainstay database business. To date, Oracle has developed its own content management offerings. But analysts suggested that Oracle, known as an aggressive acquirer, might shop for an independent content management software company, like OpenText.

Wall Street is apparently expecting Oracle or another company to join the bidding for FileNet. Its shares rose $1.52 yesterday, to close at $36.17, above the I.B.M. cash offer of $35 a share.

The I.B.M. offer is only 1 percent above FileNet's closing price on Wednesday. But FileNet's chief executive, Lee D. Roberts, called it ''a solid premium over historical trading prices of our stock.'' FileNet's share price has increased 28 percent in the last month.

For its part, Microsoft is making its bid for the content management market mainly from the desktop, analysts said. Its Office collection of productivity programs is used in most businesses for word processing, spreadsheets and presentations, and it has added software for viewing and sharing documents. Microsoft also has corporate database software, the Microsoft SQL Server.

''But Microsoft's main strength,'' Mr. Murphy said, ''is that it has the eyeballs, the desktop software that everyone uses.''

I.B.M. views content management technology as an ingredient in its ''information on demand'' strategy that blends its software and the skills of its services consultants. The idea is to be able to deliver intelligence when it is needed to help users as diverse as mortgage loan officers and police detectives make better and more timely decisions, said Ambuj Goyal, general manager of I.B.M.'s information management software unit.

Mr. Goyal points to the I.B.M. Crime Information Warehouse as an offering that combines the company's software and its expertise in services. The technology helps law enforcement agencies track criminal suspects and crime patterns by analyzing stored information from 911 calls, crime reports, detectives' e-mail, satellite imaging and mapping. The New York Police Department started using the I.B.M. product last year.

The FileNet deal, if completed, would be the latest in a series of acquisitions by I.B.M.'s software group, the 38th purchase since 2001. The software business, with sales of $15.8 billion, now accounts for 15 percent of the company's revenue and 37 percent of its pretax profit.

Correction: August 15, 2006, Tuesday
An article in Business Day on Friday about the planned purchase by I.B.M. of the software company FileNet for $1.6 billion misstated the name of a technology research firm whose analyst, Jim Murphy, commented on competition in the software market. It is AMR Research, not ARM Research.